Deferred Tax (DT): – is the amount of tax calculated in respect of timing differences or/and unabsorbed depreciation/ unabsorbed losses by using regular tax rate applicable on balance sheet date. It may be deferred tax assets (DTA) or deferred tax liabilities (DTL).

There may be difference in accounting income and taxable income. This difference can arise due to following reasons:-

  • Timing differences
  • Permanent differences
  • Unabsorbed depreciation or Unabsorbed losses

Example of Timing differences:-

  • Differences in net block of assets as per income tax and books of accounts because of –

    • Difference in depreciation due to

      • Different rates / Method
      • Pro rata treatment vs. 180 days
      • Up to Rs.5000/- assets write off under Companies Act.
    • Purchase of Scientific Research Assets
  • Expenditure u/s 43 B of Income Tax.
  • Expenditure disallowed u/s 40(a) (i), 40(a) (ii) if payment is made without deduction of TDS.
  • Losses under the head capital gain.

Example of Permanent differences:–

  • Amortization of goodwill considered disallowable expenses.
  • Personal expenses (disallowed by Income Tax).
  • Payment disallowed u/s 40(A)(3) i.e. cash payment exceeding Rs.20000/-
  • Donation to Political Parties.

DT can arise because of Timing differences or unabsorbed depreciation or unabsorbed loss.

DTA Arises when:- Expenses as per Income Tax < Expenses as per books of accounts
  ↓  
Taxable Income >   Income as per books of accounts
  ↓  
Tax as per Income Tax >   Tax as per books of accounts
DTL Arises when: – Expenses as per Income Tax >   Expenses as per books of accounts
  ↓  
Taxable Income < Income as per books of accounts
  ↓  
Tax as per Income Tax < Tax as per books of accounts

Deferred Tax in special holiday’s u/s 10A/10B/80 IA etc of Income Tax Act:-

  • DT will not be recognized which arises and reversed during the holiday period.
  • DT will be recognized which arises in holidays period but reversed after holiday.
  • Reversal of DT will be done on FIFO method.

Illustration 1

Subtraction:-

  2010 2011 2012
Accounting Income /Loss 200000 200000 200000
Depreciation as per Companies Act 50000 50000 50000
Depreciation as per Income Tax 150000 0 0
Bonus (not paid before return date) 5000 7000 9000
Personal expenses 3000 5000 8000
Bonus paid next year before return date  
Tax rate 30% as per Income Tax.  
 
Calculation of Taxable Income:-
  2010 2011 2012
Accounting Income /Loss 200000 200000 200000
Addition:-  
Depreciation as per Companies Act 50000 50000 50000
Bonus (not paid before return date) 5000 7000 9000
Personal expenses 3000 5000 8000
  258000 262000 267000
Depreciation as per Income Tax 150000 0 0
Bonus 0 5000 7000
 
Taxable Income 108000 257000 260000
Current Tax @ 30% (a) 32400 77100 78000
Deferred Tax (b) (see (i) below) 28500 (15600) (15600)
Tax expenses(a)+(b) 60900 61500 62400
 
Calculation of Deferred Tax (i)
  2010 2011 2012
Opening balance 0 (95000) (43000)
Addition:-      
Bonus 5000 7000 9000
Depreciation 0 50000 50000
 
Subtraction:-      
Bonus 0 5000 7000
Depreciation 100000 0 0
Closing balance of Timing differences (95000) (43000) 9000
 
DTA/ (DTL) @30% as on Balance Sheet date   (28500) (12900) 2700
Opening balance 0 (28500) (12900)
Charged to P& L A/c Expense/ (Income)   28500 (15600) (15600)

Illustration 2

.

  2011 2012
Accounting Income / (Loss) (15000) 150000
Depreciation as per Companies Act 21800 21800
Depreciation as per Income Tax 17500 14640
Tax Rate 30% as per Income Tax  
 
Calculation of Taxable Income:-  
  2011 2012
Accounting Income /Loss (15000) 150000
Addition:-  
Depreciation as per Companies Act 21800 21800
Deletion:-  
Depreciation as per Income Tax 6800 14640
Unabsorbed Depreciation(17500-6800) 0 10700
 
Taxable Income 0 146460
Current Tax @30% (a) 0 43938
Deferred Tax (b) ( see (i) below) (4500) 1062
Tax Expenses (a)+(b) (4500) 45000
 
Calculation of Deferred Tax (i)
  2011 2012
Opening balance 0 15000
Addition:- Depreciation as per Companies Act 15000 7160
Deletion:-Unabsorbed Depreciation 0 10700
Closing balance of Timing differences 15000 11460
 
DTA /(DTL)@30% as on Balance Sheet date   4500 3438
Opening balance 0 4500
Charged to P& L A/c Expense/(Income)   (4500) . 1062

 

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